A Few Caveats on Reverse Mortgages
Q: I read recently that the number of reverse mortgages available to older homeowners would soon be increasing. How do I find out more about these mortgages and whether I can or should even want to qualify for one? --A.C.R.
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A: Last month, the Federal National Mortgage Assn., the nation’s largest provider of home loans, said it would begin next year to offer reverse mortgage to eligible older homeowners. The move by the agency, typically known as Fannie Mae, is expected to vastly expand the scope of this program that allows older Americans to tap the equity in their homes without having to sell them and move out.
Reverse mortgages were designed in the late 1970s to help senior citizens who have accumulated substantial equities in their homes but need to tap that money to meet their normal living expenses. These mortgages, which were first offered in California in 1980, allow homeowners to spend that equity without selling their homes.
How does it work? Typically, a lending institution makes the homeowner a loan based on the borrower’s age--the minimum ranges from 62 to 65--and the property’s appraised value. After taking its loan fees and points up front, the institution pays the homeowner the balance of the loan, either in equal monthly installments, in a lump sum or as a line of credit for as long as the borrower continues living in the home. The loan balance, which is actually the amount dispersed plus interest and loan fees, is repaid when the house is sold by the owner or his heirs. One thing to remember is that if the borrower moves out without the intention to return or moves into a nursing home for a year or more, most of these loans can be called.
As you can see, these open-ended loans are complicated because it’s impossible to know how long the homeowner will continue to live in the house. If you stay just a brief time, the reverse mortgage proves a costly way to pull equity out because loan fees and points on the full potential loan amount are assessed at the outset. However, if you remain in the house a long time, the lending institution stands to pay out more than the home may be worth.
In general, because these loans tend to deplete the equity of a home quickly, they are usually considered best suited to homeowners who are in their late 70s or older with a fairly sizable home equity. Why? Because the homeowner is unlikely to outlive the term of the loan, thus offering the lender a measure of protection against the possibility of paying out more than the property is worth. The Fannie Mae program will require borrowers to be at least 62.
For more information about reverse mortgages, contact the American Assn. of Retired Persons. Send a postcard asking for the “Home Equity Conversion Kit,” publication No. D-15601, to the AARP, 601 E. St. N.W., Washington, DC 20049. AARP members in California may call (800) 424-3410.
Fannie Mae, which plans to make about 10,000 reverse mortgages next year through affiliated lenders, is also offering free brochures on its new program. Call (800) 732-6643 between 6 a.m. and 2 p.m., Monday through Friday.
What to Do If Excess Taxes Are Withheld
Q: In a recent column you discussed the salary ceilings for levying Social Security and State Disability Insurance taxes. Conceivably, people who work for two employers in one year might have more of these taxes withheld than necessary. Are taxpayers entitled to a refund in these cases? --E.M.
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A: There is a line on the California Form 540 tax return labels “excess California SDI withheld.” Last year, it was Line 41. The number you write in that blank is added to your other withheld taxes and either reduces the amount you owe the state in income taxes or increases the amount of refund the state owes you.
On the federal 1040 tax return, there is a similar line for excess withholding of Social Security taxes. Last year, it was Line 58. Again the amount you write in will either reduce your tax bill or increase your refund.
Some High Points of College Saver Bonds
Q: Where can I get additional information about the U.S. Savings Bond College Saver program? --A.G.
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A: College Saver bonds are technically the same as any Series EE U.S. Savings Bonds, with a few key differences. Let’s run through some of the high points quickly:
* At purchase, these bonds must be registered in the names of the parents of the children for whose education they are intended.
* Bond buyers must be at least 24 years old.
* Tax breaks apply only to bond proceeds used for tuition and required school fees, not for books and room and board.
* The bonds must be purchased by the parents of the children attending college in order to be eligible for the tax break.
* At redemption, the family’s adjusted gross income cannot exceed federal maximum limits. Income limits are set each year.
For more information, write for the free brochure, “U.S. Savings Bond Investor Information,” from the Federal Reserve Bank of Kansas City, P.O. Box 419440, Kansas City, MO 64141.
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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com
